Gold Bull Market Climaxes

Gold has had a rough time lately, grinding relentlessly lower. Such technical weakness has naturally spawned increasingly bearish psychology. This has led to a fringe view growing in popularity that gold’s mighty secular bull has already given up its ghost. If these new-bear arguments are correct, gold’s secular bull had to peak last August. But was that latest topping gold-bull-climax worthy? Not even close.

As the word describes, “secular” bull markets last a long time. In the stock markets, secular bulls and bears tend to run for an incredible 17 years each! Gold’s latest bull was born way back in April 2001, over a decade before its alleged climax in August 2011. With investors only having 30 or 40 productive years at best over which to invest, any decade-plus secular trend eats up a major fraction of this lifespan.

And naturally the longer any trend runs, the more it influences market psychology. Just a year or two into a new secular bull, skeptics still greatly outnumber believers. But a decade or more later after this same bull has matured, nearly everyone believes. The longer prices trend higher, the more excited investors get about their future potential. So greed and complacency gradually bloom within any secular bull.

But eventually this optimism grows excessive and spawns full-blown euphoria, and a popular speculative mania is born. These rare events are insane. Remember the tech stocks in late 1999 and early 2000? Popular manias marking secular-bull climaxes seduce in everyone, even non-investors. The resulting massive influx of capital ignites vertical gains, leading to exploding mainstream-media coverage of that bull.

The resulting feeding frenzy drives a terminal parabolic ascent. The bull market’s prices rise faster and faster at an accelerating pace until they skyrocket vertically. In the final 7 months alone of the tech-stock mania, the NASDAQ more than doubled! But once everyone remotely interested in buying has already bought in, only sellers remain so the price bubble promptly collapses. The resulting losses are epic.

These parabolic ascents driven by popular speculative manias are the calling card of secular-bull climaxes. That kind of all-in universal euphoric psychology is necessary to suck in enough capital to kill the mighty bull. So when a topping isn’t accompanied by such a monstrous vertical surge and widespread adoration, the odds are great it was merely an interim high and not the bull’s swan song.

While gold was definitely overbought at its latest peak last August, there was nothing even remotely parabolic or universally euphoric about it. Gold’s own history easily proves this. When the topping we saw in August is compared to gold’s last secular-bull climax several decades ago, they are not even in the same ballpark. But this isn’t readily apparent until gold prices are viewed in inflation-adjusted terms.

Thanks to the Fed’s relentless money-supply growth, a dollar today certainly isn’t the same as a dollar in January 1980 when gold’s last secular bull climaxed. Back then when gold first hit $850, the US median household income was under $18k. New houses averaged $76k while new cars were less than $6k! A candy bar only cost a quarter. So directly comparing nominal prices across decades is effectively nonsensical.

So we need to use real gold prices, adjust them for inflation, to make an honest apples-to-apples comparison of last August’s topping and January 1980’s indisputable secular-bull climax. As in my real gold essays, I used the US Consumer Price Index to adjust gold prices over the years for inflation. Yes the CPI is a joke, a government fiction that seriously understates true inflation for political purposes.

But since everyone outside of Washington realizes actual inflation is considerably higher than our lying government claims, the CPI is very conservative. This flawed yardstick seriously understates the actual magnitude of gold’s last secular-bull climax. In these charts this CPI-inflated real-gold metric is rendered in blue, while the raw nominal gold prices are shown in the background in light red for comparison.

When gold bears try to advance their thesis that gold’s latest secular bull climaxed last August, they often trot out a long-term gold chart. But it is not inflation-adjusted, merely the nominal red line shown in this chart. And in nominal terms, gold’s latest bull indeed utterly dwarfs the 1970s one. Even though this nominal comparison is a useless apples-to-oranges exercise, it can certainly seem convincing.

But in real inflation-adjusted terms, even when using a pathetic understated political index like the CPI, a radically different picture emerges. Our latest secular bull is actually much smaller than the 1970s one, and its August topping occurred at much lower real levels. And most importantly of all, it has been far more gradual. As the final chart below clearly reveals, gold had no parabolic verticality last summer.

On the pure size front, the 1970s bull utterly dwarfs our latest one. In real terms gold rocketed 1082% higher between January 1970 and January 1980. In the misleading nominal terms gold bulls love to cite, this was a staggering 2332% gain! But our current bull isn’t even half this size yet. In real terms it was only up 478% between April 2001 and August 2011, which was merely 640% in nominal terms.

The main reason our latest bull is less than half the size of its predecessor is there has been no popular speculative mania yet. While gold’s excellent secular-bull gains have gradually won over investors, they’ve yet to become enamored with it. Nor has the general public that fueled the NASDAQ’s parabolic secular-bull climax in early 2000. Gold simply hasn’t become a universal market darling yet.

While the next couple charts zoom into the 5 years or so leading into the January 1980 and August 2011 toppings, this secular perspective really accentuates the extreme nature of a parabolic blowoff. Gold literally skyrocketed back in 1979 after it started shooting parabolic, blasting to dizzying heights that were unimaginable at the time. And as always immediately after a parabolic climax, gold plummeted in a vertical collapse.

Meanwhile gold not only didn’t shoot parabolic from this secular perspective last summer, it didn’t collapse after August’s peak. The latest topping doesn’t even look remotely like January 1980’s secular-bull climax. So whenever I hear bears advance their this-gold-bull-is-over thesis, I have to wonder if they’ve ever bothered looking at a real gold chart. August’s topping was nothing like a secular climax.

And these next charts really drive home that point. In order to make them as comparable as possible across the vast sea of time separating these events, I kept their vertical axes zeroed. And of course the blue real-gold series are the same CPI-inflated constant 2012 dollars. The only gold-bull climax of modern times was January 1980’s, the popular-mania gold standard. It was a wild and crazy event!

Like any middle-aged secular bull, gold’s climbed in a normal, gradual uptrend for most of the late 1970s. There was no euphoria, no unsustainable greed, as global investment demand gradually moved gold higher. This metal had yet to enter the third stage of its secular bull, the infamous popular speculative mania. But in the summer of 1979, the psychological scales finally irreversibly tilted in that direction.

If you are old enough to remember late 1979, you probably want to forget it. We were burdened with a pro-big-government liberal President, so the US economy was crappy. Jimmy Carter was fixated on renewable energy, so his bright idea for addressing high oil prices was to impose a windfall-profits tax on oil production. But of course this cut supplies and forced prices even higher. And later that year the Iran hostage crisis flared up. Gold thrived in this ugly morass.

Once gold started shooting parabolic, it never really looked back. Speculators flooded into this soaring metal, including legions of ordinary American folks who had never before owned an ounce of gold. This popular mania resulted in gold prices exploding vertically in late 1979. In real 2012-dollar terms, they literally doubled in less than 2 months leading into their amazing January 1980 secular-bull climax.

Between gold’s major low in mid-1976 to that ultimate peak, a whopping 3/4ths of this run’s total gains happened in just its final 5 months! Such extreme lopsidedness is the mark of a parabolic ascent. When a price soars so vertically that gains seen in mere months utterly dwarf those of the preceding years, a popular speculative mania is afoot. There is never a fundamental justification for such big and fast gains.

Parabolic blowoffs after long secular bulls are exceedingly dangerous. Once all potential buyers are seduced in by the deadly allure of quick riches, only sellers remain so the ridiculously high prices instantly collapse. And indeed that happened right after gold’s secular-bull climax on January 21st, 1980. The next trading day alone, gold plummeted a breathtaking 13.2%! A day later this crash extended to 18.2%.

Within less than 2 months, gold collapsed vertically by 45% in real terms (43% nominal). Over half the irrational, euphoric parabolic ascent was erased as quickly as it had arisen. This post-parabola collapse or even crash is another hallmark of secular-bull climaxes. If the ascent to a major interim high isn’t extreme enough to drive a parabolic blowoff, then the subsequent collapse won’t arrive either.

And when you look at gold’s latest August 2011 peak over a similar chart span in constant 2012 dollars with the same vertical axis, the contrast couldn’t be starker. Last summer gold certainly saw no parabolic ascent from a secular perspective, and therefore no subsequent collapse. If you scroll back and forth between these two charts, it is amazing anyone can honestly call last August a bull climax.

In real terms, gold started at a considerably higher level about 5 years before this latest topping than we saw over a similar timeframe before January 1980. Since 2009 (the post-stock-panic years), gold has been gradually climbing in a normal bull-market uptrend. In the months leading into its August 2011 peak, there was a breakout but it was unremarkable compared to an actual parabolic ascent.

Nevertheless, gold was definitely very overbought last summer. I was one of the rare contrarians bold enough to publicly warn about this dangerous technical situation the trading day before it topped. But overbought conditions happen from time to time in all ongoing bulls, they are nothing particularly special. Despite gold’s strong and anomalous summer rally last year, it was nowhere close to looking parabolic.

In the final 5 months of gold’s ascent into that peak, only about 1/3rd of this metal’s total gains since early 2007 were seen. This is a polar contrast to the 3/4ths of total gains seen in the final 5 months leading up to January 1980’s secular-bull climax. A bull-ending parabolic ascent needs to rocket far enough and fast enough to ensure the lion’s share of multi-year gains accrue in a matter of months.

This latest 5ish-year run was also much smaller than the similar run leading into that earlier bull climax. In real terms gold was only up 180% (213% nominal) between early 2007 and August 2011. But back in the late 1970s, a similar yet shorter span yielded monster gains of 514% real (732% nominal). The recent total absence of any parabolic blowoff in gold means there was no popular speculative mania last summer.

And such universal euphoria is usually the only force that can drive the necessary extreme buying to burn out and slaughter a mature secular bull. Another telltale sign that August’s topping was nothing special in the secular sense was the selling immediately after it. Gold fell 3.5% on the next trading day, and a total of 6.9% over two days. This is nothing compared to the 13.2% and 18.2% in January 1980.

And by the time gold finally bounced from that correction in late December, at a low that has held to this day, gold was only down 18% over 4.2 months. Remember that immediately after that January 1980 secular-bull climax gold plummeted 45% in just 1.9 months! There is truly no comparison between the last known secular-bull climax in January 1980 and gold’s latest major interim high in August 2011.

Without the euphoric psychology of a popular speculative mania, and its resulting vertical parabolic blowoff, it is hard to imagine a major secular bull giving up its ghost. Secular bull markets are ultimately driven by sentiment. They are born in obscurity when nearly everyone has given up that market for dead after a secular bear. And as they gradually march higher over the years, fear slowly turns to greed.

The legions of scoffers and skeptics early in a new secular bull gradually become believers, and ever-more capital is invested in the strongly performing bull. Nothing begets buying like higher prices, investors and speculators always chase performance. So by the time a bull market is maturing, nearly everyone is bullish on it and already heavily invested in it. But it needs that one final push to climax.

When a price is just gradually rising, there is no overpowering impetus to buy in immediately. You can always wait for the next pullback. But when a price shoots parabolic, traders get anxious they will miss the opportunity. So they throw capital at the rocketing bull with reckless abandon. And such an extreme surge even attracts in new investors from the general public who are convinced they can get rich quick.

These soaring prices driven by the deluge of capital pouring into a mature secular bull effectively pull all the remaining buying forward. Traders’ hands are forced, they have to buy now or risk missing the boat. But this extreme buying pressure soon exhausts itself, plus it takes exponentially more capital inflows to sustain parabolic gains. The subsequent crash-like collapse is the final nail in bullish sentiment’s coffin.

Without the necessary psychological conclusion parabolic blowoffs cap secular bulls with, sentiment will generally remain bullish. After any normal topping that isn’t driven by an extreme popular speculative mania, plenty of buyers rush in to reestablish positions when they think the correction has run its course. Secular bull markets really can’t climax without the extreme psychological whipsawing of the parabolic blowoff and subsequent collapse. It shatters bull psychology.

And since there certainly wasn’t one last summer, our latest secular gold bull certainly hasn’t climaxed yet. The bears advancing this flimsy thesis haven’t studied secular bulls and gold’s last secular-bull climax several decades ago. In order for gold’s latest secular bull to be dead, August 2011 had to be its peak. But that latest topping was mild, as far away from a terminal parabolic ascent as you can get.

At Zeal we constantly consider current market conditions through the lens of historical precedent. Since the greed and fear plaguing traders’ hearts never change, countless parallels exist between the past and present. Researching them offers many valuable insights into what is likely coming next, helping us see through the endless cacophony of irrational emotional theses. Like gold’s latest bull already being over.

This false belief has hammered gold stocks to ridiculous levels relative to the metal they mine only seen before in 2008’s once-in-a-century stock panic. So if you believe gold’s secular bull is indeed alive and well, the opportunities to buy cheap gold stocks today are mind-boggling. We’ve recently been whittling the hyper-oversold gold juniors down to our fundamental favorites, which are profiled in comprehensive reports. Buy yours today and get deployed!

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The bottom line is gold’s latest secular bull almost certainly didn’t climax last summer. Such major bulls need an extreme psychological event to end them. And it comes in the form of a popular speculative mania and vertical parabolic ascent. While gold was indeed overbought last August, the resulting topping looked absolutely nothing like the previous gold-bull climax of several decades ago.

And if gold’s bull isn’t over, then gold is destined to power to new all-time highs sooner or later. And once that inevitable recovery gets rolling, capital will flood back into this metal and the stocks of the companies that bring it to market. So if you can stand strong as a contrarian and fight the popular fear gold’s latest correction spawned, there is a vast smorgasbord of incredible bargains in the precious-metals realm.

Adam Hamilton, CPA

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